Section 298 Levy of interest and penalty in certain cases

Income-tax Act, 2025

At a Glance

This document compares two texts of Clause/Section 298 of the Income-tax Bill/Act, 2025 concerning levy of interest and penalty in search cases. It matters because it prescribes interest, penalty rates, limitation and procedural safeguards that affect taxpayers subject to search-and-seizure assessments and the tax department. Who is affected: assessees subject to notices u/s 294(1)(a) and income-tax authorities. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: references throughout to section 294(1)(a) and to penalty-imposing provisions including sections 244(2), 357, 362, 377 and various sections in Chapter/Part cited as 444, 450, 451 and either 452 or 453. Context: special procedure for assessment of search cases and consequences where the return called for is not furnished within prescribed time. Coverage: interest on tax determined in search assessments, imposition of penalty equal to 50% of tax leviable on undisclosed income, and limitation/ procedural safeguards for imposing penalty.

Statutory Provision Mode

Text & Scope

The provision prescribes two primary consequences where a return required u/s 294(1)(a) is not furnished within the notice period or not furnished at all: (i) simple interest at 1.5% per month (or part thereof) on the tax on undisclosed income determined u/s 294(1)(c) for the period from the day after expiry of the notice period until completion of assessment u/s 294(1)(c); and (ii) an administrative penalty equal to 50% of the tax leviable in respect of undisclosed income determined u/s 294(1)(c), which may be directed by the Assessing Officer or the Commissioner (Appeals) in the course of specified proceedings. The section further sets conditions when penalty shall not be imposed for the block period (sub-section (3)), exceptions to that non-imposition (sub-section (4)), procedural safeguards and limitation rules for imposing penalty (sub-sections (5) to (8)), and a duty to send a copy of penalty orders to the Assessing Officer (sub-section (9)).

Interpretation

The provision targets cases where returns called for in search scenarios are not furnished, imposing financial consequences to incentivize prompt compliance and penalise concealment. The specified interest rate and flat 50% penalty on tax leviable indicate a punitive but formulaic approach. The presence of limitation rules, hearing requirements, approval thresholds and exclusion of certain periods suggest a balance between departmental enforcement and procedural safeguards. Further interpretive guidance or legislative debates are Not stated in the document.

Exceptions/Provisos

Key carve-outs and conditions in the text:

• Sub-section (3) bars imposition of penalty under this section and certain other specified sections for the block period if four cumulative conditions are met: the person furnished the return u/s 294(1)(a); tax payable on that return has been paid (or money seized is offered to be adjusted against tax); evidence of tax paid accompanies the return; and no appeal is filed against the assessment of the portion of income shown in the return.
• Sub-section (4) states the bar in sub-section (3) does not apply where undisclosed income determined exceeds the income shown in the return; in such cases penalty attaches only to the excess portion.
• Sub-section (5)(a) mandates a reasonable opportunity of being heard before penalty; (5)(b) requires higher-level approval where penalty exceeds Rs. 200,000; (5)(c)-(e) prescribe time limits linked to financial year end and appellate/revision outcomes for making penalty orders.
• Sub-sections (6)-(8) provide for exclusion of specific periods (re-hearing time u/s 244(2); period of stay by court) in computing limitation and extensions to ensure minimum actionable windows (extend to 60 days or end of month as applicable).

Illustrations

• Example 1: A notice u/s 294(1)(a) required a return of undisclosed income; the assessee failed to file within the notice period. The Assessing Officer determines tax on undisclosed income u/s 294(1)(c). Interest at 1.5% of that tax is charged for each month or part-month from the day after the notice period until assessment completion. (No monetary figures provided in the document.)
• Example 2: An assessee files a return u/s 294(1)(a) and pays tax, provides evidence of tax payment, and does not appeal the assessed portion shown in the return. Under sub-section (3) a penalty under this section shall not be imposed for the block period. If, however, the Assessing Officer determines undisclosed income in excess of the declared amount, penalty may be imposed on the excess as per sub-section (4).

Interplay

The section cross-refers to numerous other provisions (section 294(1), 244(2), 357, 362, 377 and sections in the 440s/450s). Specific interactions with Rules, Notifications, Circulars, or the substantive content of the cited sections are Not stated in the document. Therefore precise interplay and potential conflicts or supplementing procedural rules cannot be determined from the provided text alone.

Differences Between the Two Texts and Practical Impact

• Terminology of the return called for: The Bill (old version) uses the phrase "return of total income as required under a notice u/s 294(1)(a)" while the Act version uses "return of undisclosed income as required under a notice u/s 294(1)(a)".
  • Practical impact: The change narrows or clarifies the subject of the return called for - from a general "total income" return to a return specifically of "undisclosed income". This may affect the scope of the obligation and subsequent tax/penalty calculations because the Act text ties the return explicitly to undisclosed income; however, the document does not state legislative intent or consequences beyond the text. (Legislative intent: Not stated in the document.)
• Reference to the prosecuting part/chapter: The Bill refers to "in the course of any proceedings under this Chapter," whereas the Act substitutes "in the course of any proceedings under this Part."
  • Practical impact: This is an internal structural cross-reference. It could change the set of proceedings in which penalty may be directed if "Part" and "Chapter" have different statutory scopes elsewhere; the document does not state the contents or scope of the relevant Part/Chapter, so the practical effect cannot be fully determined from the text alone. (Interplay: Not stated in the document.)
• Cross-reference in sub-section (3) to other penalty sections: The Bill lists sections 444(1), 450, 451 or 452; the Act lists 444(1), 450, 451 or 453.
  • Practical impact: This changes which other penalty provisions are brought into the non-imposition condition for the block period. If section 452 and 453 refer to different provisions, this could expand or contract the situations where penalty is barred. The document does not define sections 452 or 453, so the exact practical effect is not stated. (Relevant content of sections 452/453: Not stated in the document.)

Practical Implications

• Compliance and risk areas: Failure to file the specified return u/s 294(1)(a) exposes the assessee to immediate interest at 1.5% per month on the tax determined on undisclosed income plus potential penalty equal to 50% of that tax. Even where a return is filed, if the Assessing Officer finds undisclosed income exceeding declared income, penalty applies to the excess.
• Threshold and approvals: Where penalty exceeds Rs. 200,000, prior approval from senior officers is required before lower-ranked officers impose such penalty; this creates an internal control and possible administrative delay.
• Limitation/procedural safeguards: Requirement of reasonable opportunity to be heard, and specific limitation computations (exclusions for re-hearing and judicial stay, minimum extension to 60 days and month-end rules) affect timing of penalty orders and may create windows for tactical response by the assessee. Exact procedural forms, timelines for submissions, and appellate mechanics are Not stated in the document.
• Record-keeping and evidence: The text requires evidence of tax paid to be furnished with the return to avail the bar under sub-section (3). Assessees should therefore maintain contemporaneous proof of payment and documentation supporting declared income in the return filed u/s 294(1)(a). The document does not prescribe specific documentary formats or forms. (Specific documentary requirements: Not stated in the document.)

Key Takeaways

• The Act text narrows wording to "return of undisclosed income" versus the Bill's "return of total income", potentially narrowing the scope of the return required in search cases.
• Interest is prescribed at 1.5% per month on tax on undisclosed income, payable for each month or part-month from default to assessment completion.
• A penalty equal to 50% of tax leviable on undisclosed income can be directed in proceedings, subject to procedural safeguards and limitation rules.
• Penalty will not be imposed for the block period if specified conditions (filing, tax payment, evidence, and no appeal against declared part) are met; excess undisclosed income remains penalizable.
• Limitation includes exclusions (re-hearing, court stay) and mandated minimum actionable periods (extend to 60 days or month-end) to ensure opportunity for decision-making; higher-level approval required for penalties above Rs. 200,000.
• Textual cross-reference changes (Chapter->Part; section 452->453) may alter scope of application; the document does not provide the content of those cross-referenced provisions, so implications are not fully determinable from the text alone.
• Citation/corrigendum indicates a minor textual correction; no substantive legislative history or intent is included in the document.

Full Text:

Section 298 Levy of interest and penalty in certain cases